Financial Inclusion, Digital Payments and Their Impact on Income and Tax Revenue Around the ...

120 Pages·2017·3.82 MB·English

Financial Inclusion, Digital Payments and Their
Impact on Income and Tax Revenue Around the
World
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Maherali, Alim. 2017. Financial Inclusion, Digital Payments and Their Impact on Income and Tax
Revenue Around the World. Master's thesis, Harvard Extension School.
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Financial Inclusion, Digital Payments and Their Impact on Income and Tax Revenue
Around the World

Alim Maherali

A Thesis in the Field of International Relations
for the Degree of Master of Liberal Arts

Harvard University
May 2017
2017 Alim Maherali
Abstract

This study investigates and quantifies the impact of financial inclusion and digital
payments on income and individual government tax revenues for countries around the
world. Of the almost two billion people in the world that are financially excluded, the
World Bank and other stakeholders have committed to helping one billion people gain
access to financial services and become involved in the formal economy by 2020. This
rapid pace of financial inclusion will bring vast amounts of income and tax revenues into
the global economy that is important to understand as it creates different opportunities
and challenges for developing and advanced countries that they will need to prepare for.
Using various global datasets, a methodology was developed to forecast financial
inclusion rates, digital payments rates, average income, and other factors up to the year
2020. The results suggest a sharp increase in financial inclusion rates and digital payment
rates which translate to hundreds of millions of people entering the formal economy.
Details of the most affected countries by dollar value, percent change, and the regional
affects are provided for various indicators throughout the study. With regards to
capturing the most tax revenue, China and the United States gain the most in dollar terms
while Turkmenistan gains the most in percentage terms. Between 2014 and 2020, a
cumulative $12 trillion of income is projected to enter the formal economy worldwide
resulting in $4.1 trillion in tax revenue. Governments around the globe could take
advantage of this significant opportunity.
Dedication

To Saara, thank you for everything and always. With your support, obstacles are
surmountable, everything is possible, and success is inevitable.

iv
Table of Contents

Abstract………………………………………………………………………...…….…..iii
Dedication……………………………………………………………………………......iv
List of Tables…………………………………………………………….……...……....vii
List of Figures ………………………………………………………….………..……..viii
I. Introduction…………………………………………………………………………......1
II. Financial Inclusion…………………………………………………………………......9
III. Digital Payments…………………………………………………………………......14
IV. The Widespread Benefits of Financial Inclusion……………………………….……21
Strategies to Increase Digital Payments and Financial Inclusion……….……..26
V. Methodology………………………………………………………………….………30
Tax Rate………………………………………………………………….………31
Calculating the Financially Excluded Population in Each Country……….……..31
Financial Inclusion Factor………………………………………………….….....33
Number of People Financially Included…………………………………………33
Determining Average Income …………………………………………………....34
Forecasting Average Income…………………………………………………….35
Digital Payments Rate………………………………………………………...….36
Digital Payment Growth Rate ………………………………………………...….37
Income Captured in the Formal Economy……………………………………….38
Captured Tax Revenue…………………………………………………………...39
v
Total Annual Captured Tax Revenue ………………………….………………...40
VI. Results and Analysis…………………………………………………………………41
Opportunities for Future Research…………………………………………….....75
Key Insights and Conclusion…………………………………………………….76
Bibliography……………………………………………………………………………..79
Appendix 1: GDP per Capita Versus GDP per Capita Less Financially Excluded……...82
Appendix 2: Newly Financially Included (FI) Population by Country………………….86
Appendix 3: Digital Payment Rates by Country…………………………………………91
Appendix 4: Tax Rates Used by Country………………………………………………..95
Appendix 5: Total Additional Captured Income from Newly Financially
Included Persons in $1000’s USD………………………………………………..……...99

Appendix 6: Total Additional Tax Revenue from Newly Financially
Included Persons by Country in $1000’s USD…………………………………………103

Appendix 7: List of Counties with Associated Region and Income Group………...…..107

vi
List of Tables

Table 1: Top Ten Countries by Financial Exclusion as a Percent of Population ............... 3
Table 2: Top Ten Countries by Number of Financially Excluded People .......................... 4
Table 3: Top 15 Countries by GDP per Capita less Financially Excluded ......................... 5
Table 4: Bottom 15 Countries by GDP per Capita less Financially Excluded ................... 6
Table 5: Top Ten Countries by 2014 Digital Transaction Rates ...................................... 19
Table 6: Estimated Economic Impact of Digital Finance by 2025 ................................... 23
Table 7: Countries with the Largest Financially Excluded Populations in 2014 .............. 43
Table 8: Countries with the Highest Financial Exclusion Rates....................................... 44
Table 9: Countries with the Lowest Digital Payment Rates in 2014 ................................ 52
Table 10: Countries with the Highest Digital Payment Rates in 2014 ............................. 53
Table 11: Countries with Negative Digital Payment Rate Changes ................................. 54
Table 12: Top 10 Highest Dollar Change in Per Capita Income Captured ...................... 63
Table 13: Top 10 Highest Percent Change in Income Captured 2014 to 2020 ................ 64
Table 14: Top 20 by Total Income Captured in 2020 by Dollar Value ............................ 65
Table 15: Top 10 Countries by 2020 Captured Tax Revenue .......................................... 70
Table 16: Top 10 Countries by Greatest Change in Captured Tax Per Person................. 71

vii
List of Figures

Figure 1: Visual Representation of the Number of Financially Excluded People…….7
Figure 2: Bank Accounts versus Mobile Subscription Rates for Select Countries…...16
Figure 3: Annual Payment Volume in Billions of Tanzanian Shillings………………17
Figure 4: Accelerator Prioritization Matrix…………………………………………...29
Figure 5: Estimated Number of People Financially Excluded Worldwide…………..42
Figure 6: 2014 Financial Inclusion Rates in Decreasing Order………………………46
Figure 7: 2020 Financial Inclusion Rates in Decreasing Order………………………47
Figure 8: 2014 Financial Inclusion Rates by Region…………………………………49
Figure 9: 2020 Financial Inclusion Rates by Region…………………………………50
Figure 10: 2014 Digital Payment Rates by Country in Decreasing Order……………55
Figure 11: 2020 Digital Payment Rates by Country in Decreasing Order……………56
Figure 12: 2014 Digital Payment Rates by Region…………………………………...58
Figure 13: 2020 Digital Payment Rates by Region……………………………………59
Figure 14: Income Captured in the Formal Economy Over Time…………………….61
Figure 15: Captured Income by Region……………………………………………….66
Figure 16: Total Income Captured 2015 to 2020 by Income Group…………………..67
Figure 17: Total Income Captured 2015 to 2020 by Income Group and Percentage….68
Figure 18: Total Annual Taxes Captured in Billions of Dollars USD…………………69
Figure 19: 2020 Captured Tax Revenue as a Percentage of 2020 GDP……………….72
Figure 20: Tax Revenue Captured by Region 2015 to 2020…………………………..74
viii
Chapter I
Introduction

Prior to 2011, there was no consistent set of data that was available to understand
the financial lives of people all around the world. The release of the Global Financial
Inclusion database, known as the Global Findex, changed all that. The Global Findex has
published datasets in 2011 and 2014 with over 100 indicators, covering 140 countries and
interviews with 150,000 people.1 This dataset has become the world’s most
comprehensive and consistent dataset for looking at people’s financial lives.
Using the data from the Global Findex and other sources, this study will
investigate how financial inclusion efforts aided by digital payment technology will bring
millions of people into the economy, thereby raising the amount of income and taxes that
is captured in the economy. This section will go through an overview of the state of
financial exclusion in 2014, provide some unique perspectives on the scale of the issue
and introduce the research question of this study.
The results of the Global Findex project allows, for the first time, a measurement
to be taken of just how many people were financially included, and thus counted as part
of the formal economy, and how many were not. The Global Findex also allows for
interesting calculations to be made which could provide unique insights into various

1Asli Demirguc-Kunt et al., “The Global Findex Database 2014 Measuring Financial Inclusion
Around the World” (The World Bank Group, n.d.), 2,
http://www.worldbank.org/en/programs/globalfindex.
1